What you should know about becoming a homeowner in London

In London, the average monthly rent is now £289 higher than the average monthly mortgage repayment, according to Santander. It might seem daunting but, in the current climate, becoming a homeowner in the capital could be the smartest financial decision — here are our tips for doing just that.

Saving for a deposit

It can be difficult to resist treating yourself after that long-awaited payday, but doing so can cut a substantial chunk out of your house deposit savings over time. A typical 20% house deposit in London is now in excess of £80,000, which is estimated to take nearly 10 years to save for, according to Nationwide Building Society. Slashing any frivolous spending and being savvy with your finances can help to make this seem more manageable.

As you can imagine, saving for a deposit can be a gruelling slog, requiring you to regularly sacrifice those meals out and trips to the pub. However, there are other ways to get this help, that don’t require you to give up anything.

For example, getting a Help to Buy ISA allows you to accumulate a stash of tax-free savings, to which the government adds a 25% bonus when you come to buy. Your first instalment can be up to £1,500, but after this you can only deposit up to £200 monthly.

You should also be aware that you can only use your ISA bonus towards a property valued up to £450,000 in London, and it should be the only home you intend to live in. If you’re interested in benefiting from Help to Buy, consult a mortgage specialist like The Mortgage Genie for expert knowledge and advice on getting the most out of your money.

Choose an affordable location

Although your years of saving might not be able to get you your Kensington dream house, there are still plenty of nice areas in West London to choose from which will be more suitable to your price range. Because of the excellent transport links that the capital offers, not living bang in the centre of London doesn’t have to mean inconvenience and getting caught in spirit-crushing rush-hour traffic every day — particularly if you make good use of the tube!

The cheapest areas of the capital are traditionally not the most sought-after ones, so be sure to think outside of the box. Heading to West London areas like Hounslow and Harrow can find you some of the cheapest London property prices, with average house prices standing at £407,680 and £467,839 respectively, according to recent Land Registry figures.

To find the best and most affordable locations for you, try checking out blogs and local forums to get first-hand information about the area and the people who live there. Additionally, once your viewing is over, make sure you take some time exploring the area properly to check it’s right for you before commit.

Get the right mortgage for you

With thousands of different types of mortgages available to you, it can be extremely confusing and stressful to know which one to go for. There are two main mortgage deals to choose from: fixed and variable rate.

Fixed rate

As the name suggests, these types of mortgages are set at a specific amount of interest for a certain time period, and once this is over you’ll move onto a variable rate.

Advantages

You’ll know exactly what your mortgage payments will be and are protected from any interest rate increases during your fixed term. This makes them extremely popular for people who need to budget carefully, like first-time buyers who may be putting most of their savings into buying a new property.

Disadvantages

You are tied into the mortgage, which can be unproductive if interest rates plummet and leave you on a noncompetitive rate. This is why most borrowers choose to fix their mortgage to the lowest limit permitted, rather than typical upper limit of five years.

Variable rate
The amount you pay on a variable rate mortgage is flexible, depending on changes in the main Bank of England base rate. However, this is reliant on whether you have a tracker or discount rate deal.

With tracker mortgages, interest will be set at a fixed margin above the bank rate and will move up and down in line with interest rate changes. One option is a lifetime deal, where you’ll stay on an agreed margin until your mortgage has been paid off. These are flexible and usually don’t have exit fees, giving you the freedom to switch to another deal. However, there are others with minimum terms, which tend to have lower rates.

A discount mortgage rate is linked to your lender’s standard variable rate (SVR) — the main mortgage rate charged by a lender. This means that the interest charge can fluctuate regularly, making it difficult to budget. You will be tied into these for a set amount of years and have to pay an early redemption charge (ERC) if you choose to go with a different mortgage type.

Advantages

You should benefit from lower monthly repayments if the base rate falls.

Disadvantages

On the flipside, if the interest rates increase, your monthly repayments could go up. Discount rates also tend to be less transparent than fixed rates, particularly as the lender doesn’t have to pass interest rate cuts if the rate falls below a certain level. This tends not to be a great option for those who couldn’t afford for their mortgage payments to rise.

Making an offer
Nobody likes to pay full price, and it’s no different in the housing market. Tactics like offering 5–10% lower than the asking price; negotiating in person; and staying calm, polite and level-headed are likely to get you what you want. It’s a good idea to put your offer in writing, even if that’s just via email, to reduce scope for confusion or arguments.

You’re more likely to get a discount if:

  • the property has been on the market for a long time
  • the seller seems keen to sell it quickly
  • you’re able to move in quickly
  • they’re using more than one estate agent to market it with — your estate agent will try harder to make the sale so they get commission on it

Until contracts are exchanged, nothing is legally binding as, at this point, both parties can still pull out of the sale. To prevent being a victim of gazumping, whereby the seller pulls out after accepting a higher offer from someone else, ask the seller to take the property off the market once they’ve accepted your offer. This isn’t a legal duty, but it shows you that they are serious about giving you the property and you can begin planning for life in your new home.

Buying a home in one of Europe’s most expensive cities can be extremely stressful and daunting, but following the advice in this guide can help you to successfully land your perfect home. So, get house-hunting today!

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